Free Movement of Capital in the EU28 July 2009
by inadim -- last modified 01 August 2009
Free movement of capital is an essential condition for the proper functioning of the European Union Single Market. It enables a better allocation of resources within the EU, facilitates trade across borders, favours workers mobility, and makes it easier for businesses to raise the money they need to start and grow.
Free movement of capital is at the heart of the Single Market and is one of its 'four freedoms'. It enables integrated, open, competitive and efficient European financial markets and services - which bring many advantages to us all.
For citizens it means the ability to do many operations abroad, as diverse as opening bank accounts, buying shares in non-domestic companies, investing where the best return is, and purchasing real estate. For companies it principally means being able to invest in and own other European companies and take an active part in their management.
It is easy to forget that until the mid-1990s free movement of capital did not exist in practice in a number of Member States. Even if possible in theory, many financial operations with other Member States were subject to prior authorisation requirements by national authorities, known as 'exchange controls'. These controls enabled national authorities to prevent operations a citizen or a company might want to carry out in another Member State and meant that financial integration in the Single Market was not yet in place.
The full liberalisation of capital movements in the EU was agreed in 1988 (Directive 88/361/EEC) and came into effect in 1990 for most Member States, while for the rest specific transitional periods were agreed.
The liberalisation of capital movements accompanied the development of Economic and Monetary Union and was eventually enshrined in the Maastricht Treaty, which came into force in November 1993. The Treaty provides that all restrictions on capital movements and payments, both between Member States and between Member States and third countries, are prohibited. This principle is directly effective, i.e. it requires no further legislation at either EU or national level.
Since the coming into force of the Maastricht Treaty, many more countries have joined the EU. Before joining, these countries progressively removed barriers to free the movement of capital. However, transitional periods exist for certain Member States with regard to the right to purchase second homes or agricultural land.
Free movement of capital in the EU has also stimulated a more general process of economic policy co-operation in the area of capital and payments at international level.
There are some exceptions to the free movement of capital both within the EU and with third countries. These are primarily linked to taxation, prudential supervision, public policy considerations, money laundering, and financial sanctions agreed under the Common Foreign and Security Policy.
Of course, dialogue with national authorities and monitoring is needed to ensure that these exceptions are applied correctly. Where the EU feels this was not the case, the European Court of Justice can be asked to interprete the relevant EU law.
More generally, these monitoring activities are also essential in identifying any remaining barriers and restrictions to free movement of capital in the EU.
Although these web pages can sometimes focus on problem areas, this should not detract from the numerous areas where free movement of capital is working smoothly and efficiently for the benefit of everyone in the EU.
Source: European Commission
Alin Fouladvand, MSc Risk and Finance, London School of Economics
Marco Guerra, LLM University of Milan; LLM Student, King’s College London
On 28 September 2011, the European Commission proposed a harmonised Financial Transaction Tax (FTT) aimed, among other reasons, at the reduction of competitive distortions in the single market. In the absence of an unanimous agreement between all EU Member States, a subgroup of them (the so-called FTT Zone) engaged into a procedure of “enhanced cooperation” for a common FTT, authorised by the European Parliament on 12 December 2012 and by the EU Council on 22 January 2013. On 14 February 2013, the European Commission published its detailed proposal, approved by the European Parliament in July 2013 and expected to enter into force on 1 January 2014.
The FTT will be levied to financial transactions between financial institutions charging 0.1% for the exchange of shares and bonds and 0.01% for derivative contracts, on the requirement that at least one party to the transaction is established in FTT Zone and that a financial institution established in the FTT Zone is party to the transaction. The United Kingdom, supported by several EU members, challenged this proposal urging the opposition to the tax due to its risk of damaging feeble economic growth and its compatibility with European Union treaties.Over all, the United Kingdom criticised the residence principle that forced the financial institutions to be treated as resident in the participating member states and therefore to have to make tax declarations and to pay tax, simply because they enter into transactions with other financial institutions resident in a participating state, establishing there the infrastructures for meeting those tax liabilities.
2. The EU Council’s opinion
On 6 September 2013 the European Union Council’s legal service published a (not binding) opinion where it is stated that this type of levy “wouldconstitute an obstacle to the free movement of capital as well to the freedom to provide services”,. In the following part we would aim at understanding more widely the reasons that could have inspired this position starting from the analysis of the treaties to clear if the FTT contravenes the free movement of capital.
According to the Article 63 of the Treaty on the Functioning of the European Union (hereafter, TFEU), ”[…], all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited“.
The jurisprudence of the European Court of Justice has developed a three-step approach to verify the compatibility of a provision in the light of the TFEU freedoms. With reference to the FTT, this test involves the following questions:
(i) Does the FTT fall under the scope of the free movement of capital?
(ii) If so, does the FTT constitute a restriction of the free movement of capital?
(iii) If so, is the FTT justified?
Considering the first question, we observe that the TFEU does not define the term “movement of capital”. In the case Trummer and Mayer the CJEU has indicated that, “its meaning should be determined by reference to the nomenclature in Annex I to Council Directive 88/361/EEC of 24 June 1988”, that covers “all the operations necessary for the purposes of capital movements: conclusion and performance of the transaction and related transfers”. Given the above we can conclude that the FTT falls under the scope of the Article 63 of TFEU.
With reference to the second, and more critical, question we note that the legal opinion published by the European Union Council’s legal service expresses concerns that the proposed Directive “would render less attractive financial transactions with financial institutions located outside the participating Member States, since these institutions would have to pay the FTT at different rates in different countries and the counterparty may be unwilling to be liable to that tax and to face, on these grounds, legal uncertainty and possible disputes with the authorities of the participating Member State”.
In other words, the FTT would impose a duty on those transacting with entities in the FTT zone and, therefore, restrict the free movement of capital guaranteed by TFEU by producing “an effect equivalent to that of a duty imposed in return of the possibility to enter into a transaction with an institution located in a participating Member State”.
Further into the second question, the proposed Directive applies the “counterparty” factor in a discriminatory manner. The question of free movement of capital rises due to the fact that these rules limit issuing of financial instruments by a party from a participating Member State in non-participating Member States. The reason being that these transactions would be subject to taxation with the FTT, in clear contrast to transactions to which the tax does not apply. It results from Sandoz that imposing a barrier to investment in other Member States is a restriction on free movement of capital and Article TFEU 63.
In addition, the FTT is indirectly discriminatory, because it makes more expensive for a company based in a “non-FTT” state to conduct business in a “FTT state” (and vice versa) in comparison to its local competitors.
3. The debate on the FTT
Contrary to the Council’s opinion, it has been observed that the FTT does not constitute a discriminatory restriction of the free movement of capital. This is because the levy applies to each financial transaction with determined elements and no distinctions are made between cross-border and domestic capital transactions. As explained by the jurisprudence of the Court of Justice of the EU (CJEU) the discrimination can arise through the application of different rules to comparable situations or through the application of the same rule to different situations. However, this opinion is not universally accepted between scholars. It is believed that the FTT could limit the circulation of the capitals in the common market and, furthermore, it is “considered as a high tax level since in some cases […] it will tax non-existent wealth”.
Nevertheless, the European Commission’s own legal advisors refused the Council’s legal opinion, observing that, actually, every single tax levied on a cross-border transaction limits the movement of the capitals. They observed that “[…] the fact that FTT would [not] exist outside [the] FTT area, is merely a disparity which is neutral from the perspective of the Treaty freedoms”.
The last question refers to the two derogations stipulated by Article 65 TFEU, whereby these measures should not be in the form of arbitrary discrimination or disguised restriction on free movement of capital. The first derogation, stipulated in Article 65(1)(a) TFEU is specific to tax and stipulates acceptable tax provisions that existed at the end of 1993 and, thus, it is not applicable on the FTT.The second set of derogations is stipulated in article 65(1)(b) TFEU and consists of three possible general derogations to the free movement of capital: to prevent illegal tax evasion, for the purposes of administrative or statistical information, and on grounds of public policy or public security. Clearly the FTT does not carry the prerequisites for the first two. For the latter to be applicable, the CJEU has determined that it is necessary to identify and prove “a genuine and sufficiently serious threat to a fundamental interest of society”. The FTT aims to curb speculation and this is in the interest of public security, however the latter derogation should be used carefully. In Albore the CJEU stated that a reference to public policy or security was not in itself sufficient to justify restrictive measures. It must be proven that alternative treatments would expose the Member State to real risks that could not be countered by other, less restrictive measures. Although the economic rational behind the FTT is understandable, the threat to national security is not clearly defined and the risk seriousness of not adopting a FTT is not possible to answer at this point. Also, according to Verkoojen a restriction of a fundamental freedom can be only admissible if it justifiable in virtue of the general interest, excluding thus purely economic reason. This makes the derogation in article 65(1)(b) TFEU far from applicable. To conclude, none of the express derogations in article 65(1) TFEU are applicable to the FTT.
Currently the question of the legitimacy of a FTT is still open also within the European institutions; responding to the question posed by the EU member of Parliament Marc Tarabella on the potential violation of the free movement of capital as observed in the above mentioned legal opinion, the Council answered that “a position has not been reached”.
Thus, it clearly appears how the debate on the compatibility of the financial transactions’ taxation with the EU Treaty is not yet solved. We can only observe that if there is not a definitive juridical approach in the academic debate, a consideration can be expressed exclusively based on the tax policy.
As known, since 2013 Italy implemented a tax on financial transactions; accordingly, several Italian operators started to move their business to other countries where the tax was not levied and the expected revenue fell considerably. The same it was already happened in Sweden where, after the introduction of a transaction tax in 1984.
In conclusion, the protection of a market (the capitals’ one, in our case) is not only a legal issue but should be faced considering the real effects on the economy. After all, since the Chicago School, economic arguments have been developed to claim that taxes are costs that burden the functioning of the financial markets. However, no legal principle prevents sovereign states from introducing (even stupid) taxes if they democratically decide to.
 See IP/11/1085, Financial Transaction Tax: Making the financial sector pay its fair share, European Commission, Press release. For a technycal analysis of the proposal see Adam Blakemore, Proposal for a European Union Financial Transaction tax, Journal of International Banking and Financial Law (2012) 2 JIBFL 104.
 The subgroup includes Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain.
 See Case C-209/13, Action brought on 18 April 2013 by United Kingdom of Great Britain and Northern Ireland v Council of the European Union.
 Thomas Richter, Financial transaction tax will “damage” economy, Financial Times, 8 September 2013.
 Council of the European Union, Opinion of the legal service, 2013/0045 (CNS), § 40.
 Huw Jones, 5-EU lawyers say transaction tax plan is illegal, Reuters, 10 September 2013; Louise Armistead, EU lawyers say financial transaction taxi s illegal, The Telegraph, 10 September 2013.
 Dennis Weber, Otto Marres, Taxing the Financial Sector: Financial Taxes, Bank Levies and More, IBFD, 2012, p. 124.
 ECJ, 19 March 1999, Case C-222/97.
 Furthermore, the CJEU has also indicated that transactions not listed in the nomenclature may nonetheless constitute a capital movement.
 Council of the European Union, Opinion of the legal service, 2013/0045 (CNS), § 40.
 Case C-439/97, Sandoz GmbH v. Finanzlandesdirektion für Wien, Niederösterreich und Burgenland, para. 19. – ECR 1999, p. I-7041.
 Dennis Weber, Otto Marres, Taxing the Financial Sector: Financial Taxes, Bank Levies and More, IBFD, 2012, p. 131.
Inter alia, see Case C-279/93 (Schumacker) and Case C-148/02 (Garcia Avello).
 Pablo A. Hernandez Gonzalez-Barreda, On the European way to FTT under Enhanced Cooperation: Multi-speed Europe or Shorcut?, Intertax, Vol. 31, Issue 4, 2013.
 Non-paper by the Commission services, Response to the opinion of the legal service of the Council on the legality of the counterparty-based deemed establishment of financial institutions.
 Case C-54/99 Eglise de Scientologie  ECR I-1335, para. 18.
 Case C-423/98 Albore  ECR I-5965.
 Case C-423/98 Albore  ECR I-5965, para. 22.
 Case C-35/98, Staatssecretaris van Financien v. Verkoojen, para. 46. – ECR 2000, p. I-4071.
 Case C-311/97, Royal Bank of Scotland v. Greece, para. 48.
 Question E-010636-13, 11 November 2013.
 M. Wiberg, We tried a Tobin tax and it didn’t work, Financial Times, 15 Aptil 2013. Contra, B. Ségol, Europe’s Tobin taxi s designed to work, Financial Times, 17 April 2013.
 Federico Fabbrini, The financial transaction tax: legal and political challenges towards a Euro-zone Fiscal Capacity, Centro studi sul federalismo, October 2013.